Impending changes to how firms submit information to HMRC will get them thinking about outsourcing their payroll function. Sue Weekes looks at the potential impact for recruiters and employers
Those running a recruitment business and bemoaning the speed at which the annual end-of-year return seems to come round might soon wonder what they had to grumble about. Coming up fast on the horizon is one of the biggest changes to the way employers submit information to HM Revenue & Customs (HMRC) in more than 50 years.
Real-Time Information (RTI), which will be introduced next April, demands that employers tell HMRC about the tax, National Insurance contributions (NICs) and any other deductions when or before payment is made to employees. This means an electronic PAYE [pay as you earn] return must be filed every time employees are paid, so a recruitment or umbrella company responsible for paying several hundred people on a weekly payroll will have to submit a return 52 times a year. Similarly, returns have to be made for anyone paid daily.
RTI applies to PAYE schemes and will not affect self-employed workers or, for example, contractors who have limited company status. In theory, it will improve the way the PAYE system operates and make it more accurate for both employers and employees. HMRC also claims it will eventually make the process less burdensome as gathering this information will become an integral part of an employer’s normal payroll activity. There is no doubt though that it will bring extra work initially and has the potential to considerably add to the administrative workload for anyone running a business.
The implementation of RTI has been the talk of payroll circles for months. Outside this world though, awareness is much lower, which is astonishing given the impact it could have. Small businesses that aren’t set up to submit information on a regular basis are among those likely to find it particularly challenging.
“And if immediate payment is required they could face cashflow issues, particularly if they are enrolled on ‘pay when paid’ contracts,” says David Thornhill, managing director of Simplicity, which offers a range of services to the recruitment industry, including back-office support. “Moreover, the threat of facing financial penalties and inspections if this isn’t implemented correctly puts additional pressure on these businesses.”
As Kelly Brown, payroll manager at chartered accountant and business adviser Whiting & Partners, points out, it isn’t just the penalty for not submitting a weekly or monthly return that employers need to be mindful of. “Bear in mind that in future HMRC will know in real-time how much PAYE is due so if you don’t make the right payment you could incur penalties straightaway,” she says, adding, “employers are losing the buffer of making sure everything is right at the year-end. Now it has to be right all along.”
Some organisations are already involved in pilot RTI schemes but the official ‘go live’ date is April 2013. While recruiters shouldn’t panic, they must start to put in place their plans for dealing with RTI sooner rather than later. Kate Upcraft, a payroll consultant who runs ISIS Support Services and is a member of the RTI customer user group set up by HMRC, says it will involve some hard choices.
“These include whether this is the final nail in the coffin for a firm to decide to outsource its payroll,” she says, explaining that RTI also needs to be seen in the bigger context of other legislative changes taking place such as pension auto-enrolment. “Firms need to look at the whole cost base of doing this work in-house. RTI is starting to make people think.”
RTI is also designed to support Universal Credit [the new single payment benefits system], which will be fully live from October 2013, by providing the Department for Work and Pensions (DWP) with up-to-date information about a claimant’s income. “Anything that isn’t right in the payroll could affect someone’s benefit entitlement,” says Upcraft. “We’ve never had that employee impact before with a correlation between earnings and what money comes in immediately to put food on the table.”
Like all employers, recruitment firms need to closely examine their payroll processes and systems to assess whether they are sufficiently robust to cope with RTI. If you process payroll in-house, software will need to be upgraded to meet the new requirements and any good software provider should already have been discussing this with you. If the firm is using a legacy software product or one that has been developed in-house, it may be time to switch to a new product.
The other option is to consider the outsourcing route. On the face of it, the case for outsourcing payroll in the light of RTI and other developments is a sound one. It takes the burden of additional administration away but, more importantly, provides access to specialist knowledge that will ensure you stay compliant and on the right side of the law.
Payroll can be a complex process and RTI will undoubtedly add to its challenges. “The good old days of knowing a little about tax and NI and being able to get away with it went out with the dinosaurs,” says Ian Humphrey, managing director of Back Office Support Services, which is dedicated to the recruitment industry. “Unless you are a large agency that can afford the systems and have the technical knowledge, it is unwise to try to do it [payroll] yourself. It makes more sense to delegate these tasks to people whose bread and butter it is.”
Outsourcing RTI to the right provider also presents recruitment firms with an opportunity to upgrade their overall processes. “It could provide an ideal opportunity to upgrade employee screening systems and ensure compliance with relevant employment regulations such as the Working Time Directive,” says Peter Whyte, regional director at Resource Group, which provides support and business-critical services across a number of sectors. “Such solutions can also help small businesses improve the efficiency of their payroll function while bringing benefits in terms of additional management data.”
Outsourcing payroll and therefore the burden of RTI does not mean that you absolve yourself of responsibility for it though. As Upcraft points out, “you can’t outsource your compliance”.
“The penalty notices come to you, not the outsourcer,” she says. So it is vital you choose a provider that is not only up-to-speed with RTI, but is also committed to staying ahead of any future changes.
It is early days for RTI and HMRC’s specifications are still evolving. Upcraft warns that there are likely to be further tweaks to specifications so the DWP can obtain the information it needs to calculate Universal Credits.
Before moving to RTI, employers must ensure that information such as names and addresses, date of birth and NI numbers is aligned with what HMRC holds. One of the success factors for RTI will be organisations’ ability to get the right data into systems in the most efficient way, whether they outsource or not. As Brown points out, this will depend on how good a firm’s people processes are. “Look at how you collect data for new employees, especially if you have a high turnaround of casuals,” she says.
Upcraft, meanwhile, says RTI shouldn’t just be seen as a payroll project. “It’s a cross-business project,” she says, “and it starts the minute you recruit.”
The recruitment world is no stranger to dealing with major legislative changes and Humphrey describes RTI as just another step along the continuum which has included landmark events like the introduction of the Working Time Directive and the Agency Worker Regulations. On their own, they may not be a reason to outsource payroll but the combined effect certainly makes it a more attractive option.
And as Humphrey points out, the drive towards a homogenous Europe for employment legislation will continue to place a burden on employers. Moreover, RTI is also part of the government’s drive to cut costs through increasing efficiencies. “Governments have got to carry on saving money and these types of big IT schemes that work are a good way of doing it,” he says. “So don’t expect it to be the last.”